PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 96% of par value. The cost of equity is 19%, the cost of preferred is 15%, and the cost of debt is 9%. If PAW's tax rate is 34%, what is the WACC?
A) 10.14%
B) 10.38%
C) 12.51%
D) 14.33%

Question

Quizplus · Accepted Answer

The correct answer is A. The WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - T) + (P/V) * Rpwhere:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtT = tax rateP = market value of preferred stockRp = cost of preferred stockIn this case, we have:E = 5 million shares * $8.00 per share = $40 millionV = $40 million + $10 million + $100,000 * 0.96 = $69.6 millionRe = 19%D = $100,000 * $1,000 * 0.96 = $96 millionRd = 9%T = 34%P = $10 millionRp = 15%Therefore, the WACC is:WACC = (40/69.6) * 0.19 + (96/69.6) * 0.09 * (1 - 0.34) + (10/69.6) * 0.15= 0.1014 or 10.14%

PAW Industries Has 5 Million Shares of Common Stock Outstanding